El Jem, Tunisia, 2019

Part 3: Blockchain

November 29, 2023

3. Crypto and Blockchain Uses

Strong Interest

Cryptocurrencies related projects remain the most pervasive and successful usage of blockchain technologies. But there are a vast number of use cases, ideas, and research projects that have been proposed over the past decade and a half. 

Some of the strong interest in blockchain and crypto projects is due to the inherent strengths of the technologies involved including: data integrity, robust distributed processing, open access, and cryptographic protections. Past these concrete reasons there has been excessive passion and hype, driven by exciting technologies and the high valuations of cryptocurrencies. Too often blockchain projects are initiated because the technology worked well for crypto, not because it will work as well in the proposed domain.

Potential Use Cases

Blockchain has been described as a ledger, and the dominant use case is for cryptocurrencies, so it is natural to think of it as containing financial data. But, like a database, blockchain can actually contain many types of data, posing possible utility outside of purely financial applications.

Examples of proposed blockchain projects include: ownership records (NFTs), health data, inventory data, event data, real estate information, software, etc. Blockchain is, like relational databases, a poor medium for storage of large chunks of data (blobs) like image sets, video, and large programs, but it has no problem storing the sort of data that would comfortably fit into a relational table. 

For this blog I will break the vast number of proposed blockchain-related projects into three categories.

  1. Reuse of existing chains (built on top, alongside, or using their capability)
  2. New crypto or general purpose permissionless chains
  3. Private chains

Leveraging Existing Chains

Some applications leverage existing chains, particularly Bitcoin and Ethereum. They do so because these chains have a number of strengths: They are well established, have independence and elan, encompass large user bases, have stabilized over time, and have tremendous value associated with them.

Many of the most successful blockchain companies utilize existing chains natively. Financial and payment systems that facilitate access to the chains have been particularly successful. For example, there are numerous electronic wallet applications that provide users with an easy to use way to access their crypto funds. And an array of tools and integrations that support trading crypto, paying with crypto, and integrating crypto into traditional financial systems. Coinbase, an online crypto broker, is one of the most successful blockchain companies with annual revenues of $3.3 billion. 

Another category of applications which directly leverage existing chains and have had success are chain analysis tools. Blockchains themselves are not in a randomly accessible format, so a number of companies, such as Chainalysis, pull the data off (probably storing it in relational or NoSQL dbs) for offline analysis. 

Smart Contracts

An important category of applications which run on existing blockchains are smart contracts. These are software products that are directly stored on the chain and run by the node maintainers. (In the last installment of this blog I will show an example of a smart contract.) 

For example, a simple contract could perform a payment after a specified amount of time. Contracts have been created for trading, lending, investing, gaming, and a whole host of other applications. 

Advantages of smart contracts:

  • Can be examined to see specifically how the contract operates.
  • Will always execute the contract in the same fashion.
  • Do not require lawyers, notaries, or other intermediaries to enact the contract.

Disadvantages of smart contracts:

  • Only coders can create the contracts, and only coders can understand the contracts
  • They cannot be updated, as everything in a chain is immutable. Bad code lives forever!
  • The underlying technology is still somewhat new. It can be difficult to create a secure, useful contract.
  • The programming languages used to create contracts are not as sophisticated as other modern programming languages.
  • Since all code and data is stored and executed on chain, it can be expensive to create and execute contracts. The fees can get pretty complex, depending upon the code, storage requirements, and the chain in use.
  • Storage is limited on chain, and access to external resources can be difficult.

Once a smart contract is put in place anyone using the chain can access it, if they can pay the fees involved in running it. In my simple example for a delayed payment, the creator of the contract would normally require a percentage of the payment, and the system itself would require a percentage, to reimburse node maintainers (miners) for their efforts. There may be additional fees depending upon the blockchain used.

NFTs and CryptoKitties

In the past few years non-fungible tokens (NFT) have made a splash, with billions spent to acquire them. Simply put an NFT is a record of ownership. They are usually implemented with  smart contract code to manage the tokens, which are in turn stored on the blockchain, gaining the security and immutability associated with all data on a chain. Like a car registration document won’t stop someone from stealing or misusing your car, an NFT  won’t stop someone from stealing or misusing whichever asset it represents. It just provides proof of ownership and a system for selling and trading them. Note that California has floated the idea of storing car registration information on a blockchain.

One popular system built using NFTs in Ethereum is CrytpoKitties. In this implementation the traits composing your virtual pet kitty are encoded on a blockchain, designating and describing the ownership of the specific cat. Within the CryptoKitties system no one else can own that cat, unless it is sold to them.

Performance Challenges with Existing Chains

Despite their high valuations the dominant chains, Bitcoin and Ethereum, are facing increasing performance challenges as a direct result of their popularity. Every transaction or data record added to a chain increases its size (remember, there is no way to modify or delete on a chain). 

The current size of the Bitcoin chain is over 15 GB, increasing at the rate of 1 MB/second. This is despite the fact that the consensus mechanism Bitcoin uses, which requires miners to perform maintenance work and complex calculations, restricts the throughput to something around seven transactions per second. Compare this to the Visa credit card system (not a blockchain application) which can process 24,000 transactions per second.

Bitcoin transactions are currently around 275,000 per day, while Ethereum transactions sit at around 97,000 per day. Even though the transaction rates are low compared to traditional applications, the compute power and thus energy required is massive–up to 0.5% of all the energy produced worldwide.

The costs associated with running the systems means that the fees associated with executing a contract can have fluctuated between $1 and $60, per transaction in the past few years (although most of the time it was at the lower end).  Visa, in comparison, charges a standard rate depending upon a number of factors, between 1% and 3%.

Level 2 and Side Chains

In an attempt to address these challenges and add extra value, quite a few solutions build improved performance, scalability, and functionality on top or or alongside existing chains. These are referred to as side chains or level 2 (L2) solutions. Side chains are supplemental blockchains that run alongside the original chain. Level 2 solutions are not chains themselves, but provide additional functionality and capabilities to the underlying chain.

For example the Lightning Network is an L2 solution on top of Bitcoin. Bitcoin is still the underlying currency, and transactions will eventually be reflected in the Bitcoin chain, but Lightning keeps interim transactions on its own system, operating at a much higher transaction rate. 

Skale is a side chain built to work with, and improve upon Ethereum. Transactions on Skale are faster and cheaper than on Ethereum. Skale currency can be converted to Ethereum’s ETH via a bridge.

Permissionless (Public) Chains

Rather than relying upon existing blockchains, quite a few new chains have been created over the years. Like L2 and side chain solutions, these attempt to solve some of the challenges inherent in the major crypto chains. Examples include:

  • Solana: A high-performance blockchain platform that is designed to scale to millions of transactions per second. Solana has been used to develop a variety of DApps, including decentralized exchanges (DEXes), gaming platforms, and more.
  • Avalanche: A layer one blockchain platform that is designed to be fast, scalable, and secure. Avalanche is able to process thousands of transactions per second without sacrificing security. 
  • Cardano: A third-generation blockchain platform that is designed to be more scalable and efficient than previous generations. Cardano is still under development, but it has already attracted a large community of developers and users.

Another reason new crypto chains are created is more fundamental: to make money for the folks who create them. When a new chain is created the founders and investors commonly reserve a substantial amount for themselves. If they can get others to buy into their crypto they can (and many have) make a fortune. Some of the Initial Coin Offerings (ICOs) are simply get-rich-quick scams, while there is at least one example of a joke that turned into real value. The majority of cryptocurrencies, despite their improvements and hype, fail.

Rise of Ethereum

Ethereum was created in 2014 as a more flexible, capable blockchain. It has a native currency associated with it, ETH. The primary architectural consideration was to create a more evolved coding and execution environment, facilitating more complex contracts. Solidity, a Turing-complete language, is the main (but not the only) language used to create these programs. While Bitcoin can execute basic contract code, Ethereum, and a host of follow-on projects, can run far more sophisticated programs.

Because of its great utility Ethereum has become the second most popular cryptocurrency and the basis for a very large number of tools either working directly on top of Ethereum or forking the code for a new crypto.

Private Chains

Private, permissioned blockchains tend to have a clear separation from cryptocurrencies. These implementations partially reject the entirely open, democratic, populist philosophy of crypto in favor of a more pragmatic approach. The primary advantage of private chains is that they can be centrally targeted and controlled in order to solve a particular problem.

Despite the fact that permissioned chains are privately controlled, they have still been subject to some of the irrational exuberance surrounding the entire ecosystem. Many of the proposed implementations of blockchain solutions have never been implemented, and quite a few of them that have been implemented have failed. 

The strengths and weaknesses of blockchain need to be considered when assessing the appropriateness of solutions based upon this technology.

Strengths: 

  • Blockchain can serve as an Immutable ledger, a source of truth, and a provider of data integrity.
  • They can be shared, with visibility restricted to appropriate information, and protected by cryptography. 
  • They are naturally distributed. Multiple parties can view and add information,  assuming that they have appropriate permissions.

Weaknesses: 

  • Blockchain itself It is an inefficient, append-only, hard-to-search database. It is not as scalable or searchable as NoSQL or relational databases.
  • In practice using a chain can be difficult and require technical savvy. Systems are large and complicated, requiring specialized tools to work with them.
  • Permissioned chains often lack much of the decentralized independence associated with permissionless chains. All trust and security is the responsibility of the permission holders.
  • Successful chains usually require a network effect of buy in. Enough stakeholders need to see more value than cost in using the chain. And, in the case of permissioned systems, they must have some measure of trust in the creator of the chain.

These factors should be considered to determine how appropriate and successful blockchain may be for some of the many areas it has been proposed.

In the section on Direct Government and Banking Involvement I previously discussed acceptance, regulations, and issuance by governments. While that is relevant to this section, I won’t return focus on that here. Rather, I will discus other efforts by private enterprises and consortiums.

Mini Case Studies

Tradelens

Logistics company Maersk created Tradelens in 2018 on top of IBM’s Hyperledger Fabric, which is based upon an open source blockchain project from the Linux Foundation. The idea was to digitize the global supply chain in an open fashion, facilitating access to information about shipments by the various parties involved in the process. Information about cargo would be entered at each stage of their route, providing a reliable source of truth. This is in contrast to traditional updates via email, fax, or courier.

Unfortunately this project was discontinued in 2023 due to a lack of buy-in from stakeholders, challenges with cost and performance, and concerns about security. While the solution is based upon an open source project, competitors were concerned that Maersk could exert control over access and security.

Walmart Food Tracking

In 2017 Walmart partnered with other companies in the food supply chain to announce The Walmart Food Traceability Initiative, a system based on Hyperledger Fabric. By 2018 they could use the system to track 25 products back to the farms from which they were harvested. This sort of system is becoming more important due to stricter FDA requirements on food traceability.

The blockchain solution faced challenges in adoption, as it proved costly and technically challenging for smaller producers to adopt. The average producer/farmer is not completely digitized, let alone able to run a blockchain node. In the four years after launch only one additional item, green peppers, were added to the tracking system. The status of this project is not completely clear at this time.

Medblock Medical Records

While researching healthcare applications of blockchain I discovered this useful survey from the National Library of Medicine, created in 2022. Twenty two different papers were selected covering a range of health care applications, including: medical records, analytics, supply chains, and insurance. 

Blockchain for medical records attempts to handle challenges such as: fragmentation of information, lack of a central repository, poor security, and possible manipulation. One proposal that stood out in this area was  Medblocks (one of many projects with similar names), proposed in 2018. 

Based off of this proposal, Medblocks went on to form a company, which still exists as of this writing. However, they now focus on methods other than blockchain for their medical records solutions. As they describe it  “The main problem with trying to encrypt everything and putting it in one ledger is that the nature of healthcare data is not distributed.” Blockchain is one possible solution, but they have decided to go with a more traditional API-based product.

Permissioned Summary

Permissioned blockchains have advantages, when due consideration is applied to their applicability. But they can be more complex than traditional solutions, such as APIs in front of a relational or NoSQL database. Their  nature means that they do not have full independence from the permission holder, which can discourage partners and competitors from engaging with it. The blockchain and crypto hype has helped to initially promote some projects, but in turn scared off more conservative stakeholders who would prefer tried and true solutions. 

Use Case Challenges

I did not set out to find only challenging or failed permissioned blockchain projects, yet my survey into this field quickly found the examples above. There is quite a bit of talk about proposed blockchain applications but it is difficult to find examples that have been implemented, then sustained commercial success. The further you get from the ecosystem surrounding the dominant permissionless blockchains the harder it is to find viable solutions.

But blockchain technologies are still relatively new, and quite a bit of innovation is happening in this space. I suspect there will be more successes in the future  as technology stabilizes and organizations become more judicious in terms of what they commit to.

In the final installment of my investigation into crypto and blockchain I will dive more deeply into some of the technologies, to illustrate some of the innovation and possible future directions.